View the step-by-step solution to:

Question

Can you explain this with the given information? (Questions are at the bottom)

alt="1.png" />2.png3.png4.png

1.png

(40 pts) 1. As an intern with the Bank of Milan, Tennessee, you have observed that this bank makes
two types of loans, agriculture loans and consumer loans, and offers two types of deposits, demand
deposits and time deposits. You have determined that your bank is not an asset management bank but
is a liability management bank, where core deposits plus capital are less than demand for loans. This
your bank needs to acquire money market funds in the Eurodollar market at a cost of 3.15 percent. If
your bank were an asset management bank, you would invest your excess fund in treasury securities that
yield an annual rate of 3.00 percent. Your bank has $2,000 in capital. Use the Economics of Banking
Handout for this class. The first part of this problem, using the Demand/supply functions, proves that your
bank is a liability management bank.
Demand function for agriculture loans (LA)
TA = 13.00% - .0005LA
TRA = PL = 13 LA - .0005 _'
dTRA
dLA
1 = 13.00-.001 = 3.00
LA=$10,000 rA= 8.0%
Demand for function for consumer loans (Lc)
IC = 9.00% - .0002Lc
TRe =rLc =9.00Lc -.000212
dTRE - 9.00-.0004 =.0300
dLc
Lc=$15,000 rc= 6.00%
Supply function for demand deposits (DD)
ID=-4.00% + .0004375DD
TCD =rDD =-4.00D +.000437D,
dTCD =-4.00+.00087D, =3.00%
dLD
DD= $8,000
ID= -0.50%
Supply function for time deposits (DT)
"I = 0.00 +.00015DT
TC, =rD, =0.00D, +.00015D,
dTCI = 0.00+.0003D =3.00
dL,
DT= $10,000
IT= 1.50%

2.png

October 1, 2019
Assuming an Asset Management Bank
U.S. Treasury Securities $0_
Demand Deposits $8,000.00
Agriculture Loans
$10.000.00_
Time Deposits
$10.000.00
Consumer Loans
$15.000.00
Capital
2.000.00
Total Assets
$25,000.00
Total Liab & NW $20,000.00
It for the Bank of Milan, Tennessee would appear assuming an asset management bank (Ctrl)
have
a problem that demand for assets are greater than supply of deposits plus capital.
Bank of Milan, Tennessee
Statement of Financial Conditions (pro forma)
October 1, 2019
Assuming an Asset Management Bank
U.S. Treasury Securities
Demand Deposits $8.000.00
Agriculture Loans
$10.000.00
Time Deposits
$10,000.00
Consumer Loans
$15.000.00
Capital
2.000.00
Total Assets
$25.000.00
Total Liab & NW $20,000.00
Therefore, you need to start over assuming a liability management bank. Determine the new
equilibrium balance sheet and proforma income statement.
Demand function for agriculture loans (LA)
A = 13.00% - .0005LA
TRA = PL = 13 LA - .0005 _'
dTR.
- 13.00-.001LA =
D/C
dL
LA=$
Demand for function for consumer loans (Lc)
C = 9.00% - .0002Lc
TRe =rLc=9.00Lc -.000212

3.png

Lc=$
%
Supply function for demand deposits (DD)
[=-4.00% + .0004375DD
TC, = I'DD =-4.00D, +.000437D,"
dTCD =-4.00+.00087DD =
dLD
DD= $
I'D=
Supply function for time deposits (DT)
TI = 0.00+.00015DT
TC, =rD, =0.00D, +.00015D,
dTCI = 0.00+.0003D =
dLT
DT= S
%
Bank of Milan, Tennessee
Statement of Financial Conditions (pro forma)
October 1, 2019
Assuming an Liability Management Bank
U.S. Treasury Securities $
Demand Deposits $
Agriculture Loans
$
Time Deposits
EuroDollars
$
Consumer Loans
Capital
2.000.00
Total Assets
Total Liab & NW S
Bank of Milan, Tennessee

4.png

Interest on Demand Deposits
Interest on Time Deposits
Interest on EuroDollars
Total Interest Expense
Net Interest Revenue
S

Recently Asked Questions

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes